Everybody knows by now that the IRS will be issuing regulations seeking to regulate unenrolled paid tax preparers.

Full disclosure: I am an Enrolled Agent, which makes me an IRS-regulated tax expert.  I have maintained my own tax preparation firm since 2004.  I was (briefly) an employee of H&R Block.

In fact, that's the first point to mention in all this: to read media accounts, one would think that preparer regulation doesn't exist now.  It does exist now, in spades, for a majority of tax returns.

Let's take a look at some numbers.  The IRS reported that in 2009, 132 million tax returns were filed.  Of these, 90 million were e-filed.  Almost by definition, the paper-filed returns were not done by preparers, who all use software.  Paper-filed returns are nearly-exclusively the domain of the computer-illiterate taxpayer at his kitchen table with a pencil and a desk calculator.

Of the 90 million electronic returns, 30 million were done using tax software at home.  These are dominated by a few big players, and work to make sure their software is strictly-compliant with current tax law.  So, no problems there.

That leaves 60 million returns done by a human being who prepares the return.  Most of these are done by paid preparers.  So the IRS is regulating the preparers of these 60 million returns, right?  Wrong.  Many--if not a majority--of these preparers are already regulated.  Some (like me) are Enrolled Agents, directly-regulated by the IRS.  Some are CPAs, who are regulated by the states.  Yet others are tax attorneys, who are regulated by state bar associations.

Furthermore, these 60 million returns were unchanged from 2008.  They've plateaued.  All of the growth in e-filing in 2009 was a result of increases in home tax preparation software.  As computer ownership and competency continues to deepen, and as these home tax software programs continue to improve, one can expect them to actually start eating into the human-to-human tax preparation business. 

What about poor neighborhoods that bad-actor preparers prey upon?  The IRS, faith-based, and community-activist groups have for years ramped up free returns in churches, schools, and community centers in these neighborhoods.  The IRS has a "Free File" program in partnership with home tax software preparers which can give a free or nearly-free return to tens of millions of Americans.

In short, IRS regulation of "unenrolled preparers" is a solution in search of a (probably declining and certainly over-blown) problem.  So what's going on here?

Money.  The long-term plan the IRS has is to insource all tax preparation to themselves.  In some countries, the tax office fills out your return for you, sends it to you, and makes you take them on if you disagree.  This is the opposite of how it works in this country, where the assertion of tax liability is made by the taxpayer, and the burden of proof is on the IRS if more is wanted.  If you don't believe that IRS preparation of tax returns will result in higher tax revenue, why does everyone who proposes it tout higher revenue collection as a benefit?  The fact is, people won't challenge the IRS over a spare $100 here or $300 there because they feel like they can't fight city hall.  Think about when you get your property tax assessment, and you get the idea.

Speaking as someone who gets the Enrolled Agent trade association publications, it's clear that the enrolled preparers view their relationship to the IRS in the same way a booster club might view their relationship to a college football team, or a third order might view their relationship to a religious community.  To them, the IRS is not the "benign adversary" they spar with in their client's corner.  Rather, they are the willing facilitator, always coming down on the IRS interpretation of tax law when encountering a gray area.  The IRS is licking their chops at getting all return preparers to think this way.  From there, it's a small step to insourcing preparation of the returns, either explicitly or in substance.  When that happens, taxpayers will find themselves without an advocate, forced to go it alone against an unrelenting bureaucracy with infinite resources to litigate.

Posted by Ryan Ellis on Wednesday, January 6, 2010 4:47 PM EST

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